Savings rate has been slashed - what now?!

Imagine the fate of your favourite team if the best player underperforms consistently?

This is what happens when you keep your money in a savings account.

It gets worse when banks lower their interest rates further like they did recently by slashing it to as low as 3%.

Stashing money in a savings account is similar to the best player suffering a long injury layoff.

The next question that arises is: What now? Will the team merely go through the motions and continue to languish in the doldrums, or will they explore other options?

If you are the proactive sorts, you would be hunting for other avenues that can make your money grow -- options that are safe, yet lucrative. An offhand reading would indicate there are investments that are as safe and as liquid as a savings account.

Love for savings

But, in spite of a plethora of investment options, Indians have largely stuck to savings. A Securities and Exchange Board of India (SEBI) survey found that more than 95% of Indian households prefer savings over investment.

Indians misinterpreting savings with investment is another reason for the lopsided data.

So, what is an investment and how is it different from savings? Savings is when you put aside money on a regular basis—either in a bank or in a safety locker. In simple words, savings are only cash management.

Investing, on the other hand, allows you to grow your money and build wealth in the long run. However, unlike in savings, there are risks involved while investing.

Savings vs investment

As mentioned earlier, saving your money is when you set aside a part of your income for future use. Investment, on the other hand, is the act of putting funds into productive uses. Although investment is considered riskier when compared to saving, it generally provides higher returns.

Additionally, investing your money has the potential to outperform interests earned by your money in the savings account. However, not every investment option can be bought and sold quickly. Let’s look at a few options that provide higher returns -- albeit slightly riskier -- than savings bank account.

Mutual funds

A mutual fund is a tool that invests in different stocks, bonds and other similar assets. Investing in different assets reduces risks, though not completely eliminating it. The liquid fund, a type of mutual fund, is generally a safe option. It invests in instruments like a certificate of deposits, treasury bills, commercial papers and term deposit. Also, like any other mutual fund, it can be liquidated quickly, just like a savings account. It usually takes up to three working days to get the money in your account. The four-year return rate for liquid funds is 8.27%, as on June 30, 2017.

Benefits of investing in Mutual Funds

Professional management

Instead of your cash lying idle in your savings account, they could be given to a professional management company. They can then invest your money in different sectors to help your money grow.

Diversification

We all know that it is not a nice idea to put all your eggs in one basket. Some mutual funds, like balanced funds and diversified funds, ensure that your money is spread around. Spreading your money in different sectors reduces risks. That’s because different sectors react differently to market swings.

Liquidity

While mutual funds may not be as liquid as a savings account, they can be sold in the market easily.

Returns

If you had invested in equity mutual funds four years back, your money would have grown by 20.66%. Investing in liquid funds over the same period would have fetched you 8.27%, as on June 30, 2017. In contrast, keeping your money in a savings account would have fetched you anything between 3 and 6%.

Bottom line

The fear of market volatility could affect returns while investing. But, they would still be higher than that you get from a savings account, especially now with the further lowering of bank interest rates.

About the author

Rachita Kotian is an independent blogger and writing has been her passion for a long time. A literature major, she loves exploring the world of health, lifestyle, travel and finance. When she’s not writing, she’s most likely listening to music, cooking, surfing the web, or catching up on the latest flick.